Arihant Capital Markets Ltd Management Discussions.
FY2018-19: At a glance
The global economic activity which was on an upward growth trajectory since 2016-17,remained healthy at 3.8% in first half of 2018-19 however softened to 3.2 percent in the second half of 2018-19.The economic activity moderated amid renewed trade tensions and tariff hikes between the United States and China, resulting in decline in the overall business sentiments, tightening financial conditions, and higher policy uncertainty across many economies. Due to this global backdrop, S&P Moodys has projected the global growth outlook at 2.8% in 2019.
The key risk elements like escalation in trade tensions can adversely affect the consumer con dence and capex plans, which in turn could impact growth negatively. However, over the medium term, growth drivers will be, easing financial conditions, scal and monetary stimulus by China, lower unemployment levels and stable consumer spending in the United States.
For India, FY19 was a volatile year where in strong growth in first half was offset by weak growth and negative sentiments in the second half of the year. The key highlights were the volatile crude oil prices owing to weak global sentiments, the fallout of the NBFC crisis, and resolution of some large NPAs under Indian Bankruptcy code (IBC). Further, increase in capital allocation for recapitalization of public sector banks, merger of some prominent public sector banks, launch of PM Kisan scheme, rationalization of GST rates on various goods were the key positive developments during the year.
As per IMF estimates, Indias economy grew 7.1% in FY19 and is expected to accelerate to 7.3% growth in FY 19-20 and to 7.5% in FY21.The positive stance by the IMF has been on the back of recovery in consumption and a more expansionary stance on the monetary policy adopted by the central bank. During the year, Foreign Portfolio Investors (FPIs) invested approximately US$0.2bn in FY19 vs US$ 3.4bn in FY18. However, the first three quarters of FY19 witnessed out ows of US$8.2bn followed by sharp recovery in fourth quarter with in ows of US$ 8.4bn. This resurgence of in ows were largely led by expectations of a strong and stable government; falling yields in USA and Europe; favorable crude oil prices and a stable Indian Rupee; positive impact of the implementation of GST reforms.
Outlook for 2019-20 : The path leads to a cautious year ahead
As per Moodys, global economic growth is expected to grow at slower pace of 2.8% in 2019-20, decelerating from an estimated 3.2% growth rate in 2018-19 primarily led by elevated U.S.-China trade tensions and the U.S. conflict with Iran. Other risks to the outlook include the looming U.S. tariffs on Mexican goods and the lack of clarity over Brexit.
Going forward, it will be important for policy-makers and multilateral institutions globally to isolate economic activity from inward-looking trade protectionist policies, which could have a significant impact on the global trade flows and overall economic productivity.
Indian Economic Highlights:
The outlook for FY20 remains uncertain owing to softening of domestic consumption and the slowdown in the PMI, automotive sales, tourist arrivals and rail freight. However, with a clear mandate, the focus shifts on the improvement of rural demand through various schemes coupled with a stable monsoon outlook. The Centre scal de cit target of 3.4% remains an uphill task. The recent positive developments are the decline in oil prices, RBIs favorable policy stance and softening bond yields.
With the new government having been re-elected with a strong mandate, a continuity in policy reforms will continue. Therefore, renewed focus on infrastructure, manufacturing and rural development will be at the forefront going forward. Centres Fiscal de cit was contained at 3.4% (slightly above the budgeted target of 3.3%), despite significantly lower than estimated GST collection, due to curtailed expenditure by the Government in Q4FY19.
The liquidity in the banking system, which was impacted after the NBFC fallout is likely to see gradual improvement. The Centres tax revenues for FY19 were Rs. 1.1tn lower than projections in the interim budget. States are likely to step-up spending, as there is scal room available to increase scal de cit from 2.6% as budgeted in FY20.
Who we are and what we do
Established as a stock broking company in 1992, we are today one of Indias leading integrated financial services company. Initiated with the idea to make financial products and services easily understandable and accessible to all, the Company now offers equity, commodity and currency broking services, merchant banking services, distribution of financial products, financial planning, and depository services through its 800 plus investment centres across India servicing over 1.45 lac customers that includes retail, high net worth individuals and domestic and foreign financial institutions. Here is a list of products and services offered by your Company:
|Equities and Derivatives Broking||Merchant Banking (Category I)|
|Commodities & Currency Broking||Loan Against Shares (RBI Registered NBFC)|
|Mutual Funds & IPO||Priority Client Group|
|Bonds and NCDs||Portfolio Management Services (PMS)|
|National Pension System (NPS)||Affordable housing|
The Company conducts its operations along with its subsidiaries (together hereinafter referred to as Arihant or the Company).
Review of Operations
The operations function at your Company have been designed to deliver a superior and differentiated customer experience. During the FY your companys consolidated income stood at Rs. 103.07 Cr and reported a profit after tax of Rs. 19.02 Cr. With our ongoing strategy in place to handle future business, we are clear that all our efforts must converge into real value creation for all our stakeholders in the coming times.
Your Companys Consolidated performance during the financial year 2018-2019 is as follows:
|Year ended||March 31, 2019||March 31, 2018|
|Income from operations||9,483.43||9,710.35|
|Profit before Tax||2,652.22||2,980.03|
|Tax on Profit||750.20||913.20|
|Net Profit for the period||1,902.02||2,066.83|
|Earnings Per Share (Rs.)||9.13||9.93|
During the year under review, your Company secured Portfolio Management Services (PMS) license from SEBI under its subsidiary Arihant Asset Management Ltd. Your Company also took registration under Pension Fund Regulatory and Development Authority as a Point of Presence service provider for National Pension Scheme to add as an enhanced offering in third party product list. We also introduced the all new Wealth4 Me mobile application for online trade and execution of mutual funds and Arihant Mobile application with a host of new features, in an attempt to enhance the digital offerings of its clients.
Risk factors relating to our business operations
Every Company is prone to internal and external risks, including risks around compliance, operational, strategic and many others. Many of these risks are inherent in the enterprise structure of any organization and may interfere with an organizations operations and objectives. The Company takes responsibility to proactively identify and address risks and opportunities to protect and create value for its stakeholders.
Some of the crucial risks impacting the Companys overall governance are detailed below:
Economic Risk: The major sources of our revenues are derived from equity brokerage business. Hence, like other players in the market, our business is highly sensitive to economic and political conditions prevalent in the country and across the globe. Any sustained down turn in general economic conditions or Indian equity markets and severe market uctuations would likely result in reduced client trading volumes and net revenues, and hence, will have a material adverse effect on our pro tability.
Technological risk plays a significant role in our industry: The substantial amount of costs involved in deployment of technology is a critical factor. Obsolesc is another major concern as up gradation of technology is an ongoing exercise. Any significant changes in technology would pose pressure on our pro tability.
Market Risk: The Company aims to mitigate market risks by using investment policies, Investment committees, and requirement of investment justi cations and regular monitoring of performance.
Reputation Risk: Over the years, the Company pays special attention to issues that may create a reputational risk. Events that can negatively impact the organisation position are handled cautiously ensuring utmost compliance with relevant laws.
Credit Risk: The Company Provide exposure limits to clients, based on the collaterals of securities that we receive from them, inconnection with our brokerage business. Sharp change in market values of securities and the failure by parties to honour the commitments on a timely basis could have a material adverse effect on the pro tability of our operations.
Competition Risk: The financial sector in India is in some ways well established but growing at a fast pace both in terms of companies entering the market as well as in terms of demand and customer base. As a result, Competition risk is always a consideration. Emergence of disruptive business models like discount broking, robo-advisory and payment bank companies in the financial markets space will cause competition going forward.
Compliance Risk: Compliance risks result from violations or non-compliance with Laws and Regulations, Code of Business Conduct and Contractual Compliance having material impact on the Companys financial, organizational and reputational standings. The Company has strong compliance management framework, supported by adequate tools and IT systems, to identify, assign and monitor compliance with applicable Rules and Regulations. In addition, an independent internal auditor reviews compliance management framework and submits their findings to the Audit Committee.
Human Resources are a key ingredient for your Company and the success of the Company involves critically depends on quality of manpower in the organization. We maintained a competitive healthy and harmonious work environment at all levels. Over the years company has developed a strong set of values and policies which support them to work freely and develop their capabilities to take responsibility. The Company is committed to providing an environment that is encouraging and appreciative under which the employees can work to their potential and grow professionally as well as personally. The company continuously invests in the development of its human resources through a series of employee friendly measures aimed at talent acquisition, development, motivation and retention.
Our Company continued to emphasise on improving and upgrading the skills of its employees and conducted several training programs in this regard. Moreover, in line with the Companys staff certi cation policy, employees are mandatorily required to take relevant industry standard certi cations such as National Institute of Securities Markets (NISM), Association of Mutual Funds of India (AMFI), Chartered Financial Analyst (CFA) and Chartered Financial Planner (CFP). Most of the Companys employees are qualified professionals (CA, CS, MBAs) or have obtained such certi cations.
Signi cant efforts are taken in order to develop a strong leadership potential across the organization by imparting leadership qualities in employees through highly focused seminars and programs.
Corporate Social Responsibility (CSR)
At Arihant, we are aware of how our operations impact our stakeholders, especially the communities where we operate. We are reliable and responsible company that operates in a socially and environmentally sustainable manner. We primarily focus on health, education, environment and rural development by promoting social welfare programmes and community participation near our facilities and of ces.
As per Section 135 of the Companies Act, 2013, a Company, meeting the applicability threshold, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on Corporate Social Responsibility (CSR) activities. The areas for CSR activities are eradication of hunger and malnutrition, promoting education, art and culture, healthcare, destitute care and rehabilitation, environment sustainability, disaster relief and rural development projects.
The CSR Policy may be accessed on the Company Website at the link: http://www.arihantcapital.com
The key philosophy of the Company CSR initiatives is to promote development through social and economic transformation. The Company has, interalia, identified following areas in which it may engage for its CSR activities.
Addressing identified needs of the underprivileged through initiative directed towards promoting education including preventive health care.
Addressing the cause of environmental sustainability by creating awareness on minimizing the use of plastic, promoting eco-friendly products and other measures to save the planet.
Any other activity falling within the scope of Schedule VII to the Act.
During the year, the Company has spent more than Rs. 26.52 Lacs on CSR activities.
The details of CSR activities are a part of Board Report.
Internal Control System
The Company has a proper and adequate system of internal controls commensurate with the size of the Company and the nature of its business to ensure that all the assets are safeguarded and protected against loss from unauthorized use or disposition and those transactions are authorized, recorded and reported correctly and adequately.
The Companys internal controls are supplemented by internal audits, review by management and documented policies, guidelines and procedures. The system has been designed to ensure that financial and other records are reliable for preparing financial information and for maintaining accountability of assets.
All financial and audit control systems are also reviewed by the Audit Committee of the Board of Directors of the Company.
Your company has a risk management framework, appropriate to the size of the Company and environment under which it operates. The risk management process covers risk identi cation, assessment, analysis and mitigations and policies are framed appropriate for various risk categories namely Credit risk, Market risk, Operational risk and Regulatory risk. The Audit Committee reviews these policies and processes regularly and is periodically informed about the risk assessment, impact of risk on the business and mitigation plans.
At Arihant, we recognise the need of creating an eco-friendly and sustainable environment. We also encourage our clients to go paperless by signing up for electronic trade con rmations (e-contract notes), account statements and bills. Not only is this good for the environment, but it enables clients to receive important information electronically even if theyre away from home.
We believe in driving successful performance in tandem with ethical behaviour with an unwavering commitment to reducing environmental impact.
Commitment to doing what is right
Our top management team and Board of Directors are resolved to do what we believe is best for our Associates, Clients and Shareholders.
Opportunities and Threats
Commitment to superior quality and process execution.
Increasing Financial Services industrys share of wallet for disposable income.
Leadership in sophisticated solutions that enable our clients to optimize the ef ciency of their business.
Leveraging technology to enable best practices and processes.
Corporates looking at consolidation / acquisitions / restructuring opens out opportunities for the corporate advisory business.
Short term economic slowdown impacting investor sentiments and business activities
Slowdown in global liquidity ows
Increased intensity of competition from local and global players
Market trends making other assets relatively attractive as investment avenues
Arihant Capital Markets Limited is a well-established brand among brokers in India. ACML have experienced top management teamwith a successful track record. It has established leadership in franchisee business. The Companys relationship with the franchisees has become stronger as they grew. ACML has multiple business partner models in franchising and is strongly committed to enhance growth and pro tability of each of its franchisee. It believes that its understanding of equity as a class asset and business fundamental drives the quality of research and differentiates from its competitors. Company is having well experienced manpower which successfully contributes towards business expansion of the Company.
We intend to capitalize on the growth and consolidation of the brokerage industry and leverage our infrastructure to grow our market share and pro tability. To achieve these goals, we seek to keep ourselves in sync with the growing dynamics of the industry on technology front, expand our network particularly in markets where the competition is not intense and potential is high. We seek to further strengthen our position by increasing our relevance to clients by being able to understand their investment requirement and offer them a solution that best meet their needs (client centric approach).
Our strategic objective is to build a sustainable organization that remains relevant to the agenda of our clients, while creating growth opportunities for our employees and generating pro table returns for our investors.
The Company has a well-structured, documented and demonstrable compliance framework that helps the management monitor and report compliance risk and exposure to the Board.The Managing Director makes a declaration at each Board Meeting regarding compliance with provisions of various statutes after obtaining con rmation from all the operating departments across all subsidiary companies within India.
Outlook and challenges
The continual growth in the finance sector is expected to give the necessary support to the finance industry. The Company is making all efforts to accelerate growth of its business. It expects to improve its position in the market by focusing on technologically advanced and more pro table products/market segments. However, the challenges remain on being able to leverage these initiatives to carve out a space in the competitive broking industry and be able to take Company to the masses efficiently and at optimal cost.
Certain statements in the Management Discussion and Analysis describing the Companys objectives, projections, outlook, expectations, estimates and others may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates, new regulations and government policies that may impact the Companys business as well as its ability to implement the strategy. The Company does not undertake to update these statements.